TEXT-S&P ratings on Bank of America unaffected by Q3 results
Oct 17 - Standard & Poor's Ratings Services today said its ratings on Bank of America Corp. (BofA; A-/Negative/A-2) are not affected by the company's fair third-quarter results, which were in line with our expectations, considering current operating conditions. BofA generated Standard & Poor's adjusted pretax income of $3.2 billion (excluding fair-value option and debt-valuation adjustments of $1.9 billion). Earnings were essentially flat compared with a $3.1 billion profit in the second quarter but much better than a $1.8 billion loss in third-quarter 2011. Earnings reflect $1.6 billion of litigation expenses (including settlement of the Merrill Lynch shareholder lawsuit) and an $800 million charge on deferred-tax assets resulting from reduction in the U.K. corporate tax rate. The company released $2.3 billion of reserves (including National Mortgage Settlements and new regulatory bankruptcy guidance), compared with $1.9 billion in the second quarter. The net interest margin (NIM) expanded 11 basis points (bps) to 2.31%, benefiting from lower parent company debt and sequentially lower market-related premium amortization and hedge ineffectiveness. Lower securities yields and subdued new loan demand continued to constrain margins. We believe that the full impact of the roll-off of parent company debt and recent redemptions of high-cost trust preferred securities and subordinated debt ($6.2 billion in third-quarter 2012 and $5.1 billion announced for fourth-quarter 2012) should help keep net interest income stable in subsequent quarters and propel modest increases in 2013. Higher litigation costs counterbalanced the 3% increase in noninterest expenses, sequentially, as a result of benefits accruing from the "New BAC" program. Deposits increased 2.7% sequentially, while commercial and industrial and commercial real estate loans led overall loan growth, which offset declines in discontinued and Countrywide mortgage portfolios. Asset quality continued to improve, with the net charge-off ratio declining 19 bps sequentially (excluding new regulatory guidance on Chapter 7 bankruptcy treatment), and the nonperforming assets ratio was down 6 bps to 2.64%. We expect asset quality to continue to strengthen, though at a slower pace, led by improvements in commercial loans. Outstanding representation and warranty claims increased 12% sequentially to $25.5 billion, with claims almost equally split between government-sponsored (GSE) and private-label entities. Management adjusted their estimate of potential losses for both GSE and non-GSE representations-and-warranties exposures to up to $6 billion over accruals from up to $5 billion in second-quarter 2012 for only non-GSE representations-and-warranties exposures. Capital strengthened substantially, with the estimated Basel III Tier 1 common ratio (including the terms of the Fed's proposals) rising 102 bps to 8.97%, partially because of accumulated other comprehensive income gains (which added 18 bps) and risk-weighted assets declines (which added 40 bps). Our rating outlook on BofA remains negative, reflecting our negative outlook on the U.S. sovereign (given the two notches of extraordinary support we incorporate into our ratings on BofA), its elevated litigation risks, and a still-fragile housing market. Representation and warranty claims, although currently manageable, could dampen earnings. Although visible progress is being made on capital building and cost reduction, we look for BofA's to deleverage its balance sheet further and continue to strengthen earnings. We also continue to evaluate possible adverse conditions in the housing market, new legislation (particularly the Volcker Rule), derivatives legislation, and outstanding litigation.